Should RBI raise rates?

Should RBI raise rates?
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First Published: Wed, Oct 07 2009. 09 36 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Wed, Oct 07 2009. 09 36 PM IST
The monetary tide is turning.
Australia on Tuesday became the first major economy to increase interest rates since the world financial crisis broke out more than a year ago. Israel —not a global heavy hitter —had increased its benchmark rates in August.
Most central banks know that they will at some point have to suck back some of the unprecedented liquidity they pumped into the world economy when it was on the verge of total collapse. A lot is said about the need for exit policies, but action has been rare. Much depends on the state of the fragile global recovery and how soon inflation rears its ugly head.
Illustration: Jayachandran / Mint
The Reserve Bank of India (RBI), too, has been making it clear that domestic interest rates will have to go up at some point. “While there is a broad agreement that we need to exit from the present excessively accommodative monetary and fiscal policies, there is less agreement on when and how we should exit,” its governor D. Subbarao said in Istanbul this week.
India will have to be ahead in the queue of countries that seek an exit from loose monetary policies. The question is whether India needs to push up interest rates right away—when Subbarao announces his new monetary policy at the end of October—or wait for a few more months.
We believe that there is a case to wait and watch for some more time despite the inevitable rise in inflation in the coming months. It is interesting that Subbarao mentioned both monetary and fiscal looseness in his Istanbul speech. The government has thrown fiscal caution to the winds in a bid to support domestic demand as well as fund vote-grabbing social sector schemes. The result is a record net borrowing need of around Rs4.5 trillion.
The central bank has been trying its best to help the government borrow this huge amount of money without rattling the bond markets. But long-term interest rates have gone up despite this. They could spike further in case companies step up their borrowing as the economy recovers its growth impulse. An interest rate hike by RBI at this juncture could make matters worse and come in the way of an investment revival.
The finance ministry has said that it expects its borrowing programme for the year to be done by the first week of February. That would be a better time for a rise in the policy rates that the central bank controls—hopefully followed by a strong and credible programme to cut the fiscal deficit announced in the next Union budget.
Can RBI afford to hold fire for another three months? Tell us at views@livemint.com
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First Published: Wed, Oct 07 2009. 09 36 PM IST
More Topics: Ourviews | RBI | Interest rates | Subbarao | Inflation |